Consumption tax fiasco magnified by absence of financial fundamentals

To paraphrase Winston Churchill’s all too famous words at the time of the Battle of Britain: “Never in the field of economic policy has so little been achieved by so many hours wasted by so many lawmakers.” The outcome of the debate over Japan’s consumption tax would surely extract a quote to surpass all Churchillian quotes in its acerbity were he here to witness it.

One really does not begin to know where to start in attacking the whole process that has led up to the hotchpotch bill, which is now up for parliamentary debate. While the list of complaints against this bill is endless, in my view there are two points that merit special attention as fundamental flaws.

One is that there seems to be simply no awareness of the big picture. The other is that no attempt has been made to correct an initial problem with the existing consumption tax system.

The big picture is the Japanese tax system as a whole. The system has been in need of an overhaul for a very long time. It is a system that was created with the immediate postwar economy in mind. It also uses a framework that has relied far too much on taxing people who are salarymen. Since there are fewer and fewer Japanese in Japan, and fewer and fewer of them are salarymen with jobs for life, this way of doing things, taxation-wise, is obviously losing its effectiveness.

We need a taxation system that can raise revenues from people’s spending activity, regardless of nationality. In a globalized world where people move across national boundaries as a matter of course, income taxes levied on a country’s nationals can no longer be the ideal taxation tool.

Tax structures are supposed to be able to tell you what kind of an economy you are looking at. Yet no amount of scrutiny of the existing tax system will reveal the stage of maturity and development that this economy has reached. Not even Sherlock Holmes could hope to deduce the correct answer if the clues are this out of step with reality.

The second problem is that the existing consumption tax system includes a “simplified system” for small- and medium-size businesses with incomes levels of ¥50 million or less. If you qualify, you can calculate your consumption taxes payable by simply multiplying the consumption taxes you receive from your customers by a given ratio. If you are a wholesaler you multiply your consumption tax receipts by 0.9 to estimate your taxes payable. Subtract that amount from the consumption taxes received, and you get the net tax amounts you should hand over to the tax authorities.

The existence of this method makes it very difficult to introduce tax exemptions and zero rates into the whole consumption tax structure.

Suppose you are a small wholesaler whose purchases are predominantly made up of zero-consumption-tax items. Under the existing system, you would still be allowed to assume that you have paid consumption taxes equivalent to 90 percent of the taxes received on your sales, even though you have actually paid nothing because your inputs are all zero-rate goods.

The simplified method was introduced on the assumption that smaller businesses would find it too burdensome to keep track of all their consumption tax payments throughout the year. This is another way of saying that they cannot do their sums. Which of course is not true.

Now would have been a good time to remedy this special treatment so that a more flexible scale of taxation rates could be introduced into the world of consumption taxes.

Alas. Churchill weeps.

Noriko Hama is an economist and professor of Doshisha University Graduate School of Business.